DY..C.I.T., BANGALORE V. M/S STATE BANK OF MYSORE, BANGALORE

ITA 684/BANG/2015

AI Insights

The case involves cross-appeals by the State Bank of India (formerly State Bank of Mysore) and the JCIT, Large Tax Payers Unit, Bangalore, concerning various disallowances and additions made during the assessment year 2011-12. The primary issues revolved around the taxability of recoveries from bad debts, the computation of deductions under section 36(1)(viia), and the classification of certain expenditures as capital or revenue. The Tribunal examined precedents and statutory provisions to resolve disputes over deductions claimed for contributions to medical benefit funds and expenses related to rights issues of shares.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 783659 (ITAT-MUMBAI)
• Duration Of Justice: 10 year(s) 5 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-11-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: G
• Assessment Year: 2011-2012
• Appeal Filed On: 05-05-2015
• Other Referred Cases: State Bank of India vs. ACIT, CIT vs. Lord Krishna Bank, Nectar Beverages (P.) Ltd. vs. DCIT, Bharat Earth Movers Vs. CIT, Glaxo Smithkline Pharmaceutical vs. ACIT, Exide Industries Ltd. vs. CIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Matter Remanded
• Court: TRIBUNAL
• Department Lawyers: P.C. CHHOTARAY; SPL. COUNSEL
• Assessee Lawyers: KETAN VED; NINAD PATADE
• Keywords: Opportunity of being heard; Retrospective amendment; Business expenditure; Question of law; Bad and doubtful debts; Corroborative evidences; Depreciation; Capital expenditure; Deemed to accrue or arise in india; Share purchase agreement; Bogus
• Section: 32; 37; 43B; 37(1); 260A

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, MUMBAI BEFORE JUSTICE (RETD.) C V BHADANG, PRESIDENT & MS PADMAVATHY S, AM I.T.A. No. 661/Bang/2015 (Assessment Year: 2011-12) State Bank of India (erstwhile State Bank of Mysore prior to merger), Local Head Office, Compliance Department, 4th Floor, 65, St. Marks Road, Bangalore-560001. PAN: Vs. JCIT, Large Tax Payers Unit, Bangalore. Appellant) : Respondent) I.T.A. No. 684/Bang/2015 (Assessment Year: 2011-12) JCIT, Large Tax Payers Unit, Bangalore. Vs. State Bank of India (erstwhile State Bank of Mysore prior to merger), Local Head Office, Compliance Department, 4th Floor, 65, St. Marks Road, Bangalore-560001. PAN: Appellant) : Respondent) Assessee by : Shri Ketan Ved & Ninad Patade, AR Revenue by : Shri P.C. Chhotaray, Spl. Counsel Date of Hearing : 18.08.2025 Date of Pronouncement : 03.11 .2025 Printed from counselvise.com 2 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) O R D E R Per Padmavathy S, AM: These cross appeals by the assessee and the revenue are against the order of the Commissioner of Income Tax (Appeals)-14, Large Tax Payer Unit-Bangalore [In short 'CIT(A)'] passed under section 250 of the Income Tax Act, 1961 (the Act) dated 27.02.2015 for Assessment Year (AY) 2011-12. The issues contended by the assessee and the revenue through various grounds are as under: Assessee's grounds Issues Ground Number Addition on account of recoveries made out of bad-debts written off but not offered as income. 1 Disallowance due to re-computation of deduction under section 36(1)(viia). 2 Disallowance of depreciation on Automated Tailor Machine (ATM) and other computer peripherals by reclassifying as Plant & Machinery 3 Disallowance of certain liabilities by treating as contingent liability 4 Disallowance of deduction under section 36(1)(viii) 5 Disallowance of unamortized incremental payment / contribution to approved gratuity fund and payment/contribution to approved pension fund 6 Disallowance of contribution to retired employees medical benefit fund 7 Disallowance of capital expenditure incurred towards rights issue 8 Grounds of Revenue's appeal Issues Ground Number General 1 Deduction under section 36(1)(viia) (connected to ground no.2 in assessee's appeal). 2 Allowing provision for Janata Deposit Collector Gratuity 3 Expenditure incurred towards right issue of shares (connected to ground no.8 in assessee's appeal) 4 Printed from counselvise.com 3 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) 2. The assessee is a subsidiary of State Bank of India and governed by the State Bank of India (Subsidiaries Bank) Act 1959. The assessee filed the return of income for AY 2011-12 on 29.09.2011 declaring a total income of Rs. 521,48,22,660/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. The Assessing Officer (AO) completed the assessment by making various additions / disallowances to the tune of Rs. 526,24,43,384/-. On further appeal the CIT(A) gave partial relief to the assessee. Both the assessee and the revenue are in appeal against the order of the CIT(A). Addition on account of recoveries made out of bad-debts written off but not offered as income – Ground No.1 of Assessee's appeal 3. During the year under consideration the assessee recovered Rs. 23,64,14,868/- out of bad-debts written of in earlier years and the same was not offered to tax. The assessee submitted that the bad-debts was not claimed as deduction under section 36(1)(vii) in earlier years and therefore the amount recovered now is not offered to tax. The AO held that the amount recovered should be brought to tax under section 41(1) by stating that the impugned amount had been claimed as deduction in earlier years under section 36(1)(viia). Aggrieved assessee filed further appeal before the CIT(A). The assessee submitted before the CIT(A) that the issues is covered by the decision of the Tribunal in assessee's own case for earlier AYs. The CIT(A) however did not accept the submission of the assessee and held that the decision in earlier AYs are distinguishable. Accordingly, the CIT(A) upheld the addition made by the AO. 4. The ld. AR submitted that the recovery of bad-debts does not fall within the purview of section 41(1) since the deduction claimed by the assessee under section 36(1)(viia) is not for a loss, expenditure or trade-in-liability. The ld. AR further Printed from counselvise.com 4 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) submitted that the issues is covered by the decision of the Co-ordinate Bench in assessee's own case for AY 2010-11 (ITA No. 660/Bang/2015 dated 05.08.2025) where the Tribunal remanded the issue back to the file of the AO to verify if the recovery is in respect of an amount written off and allowed as a deduction under section 36(1)(viia) and not under section 36(1)(vii) of the Act. The ld. AR also submitted that the issue for the year under consideration being identical, the decision of the Co-ordinate Bench is applicable in assessee's case also. 5. The ld. DR on the other hand submitted that the assessee has claimed deduction towards bad-debts in earlier years either under section 36(1)(vii) or section 36(1)(viia) and in that case the recovery against such claim should be brought to tax. The ld. DR further submitted that the assessee has been claiming relief in earlier years on the ground that the recovery cannot be taxed under section 41(4) for the reason that the assessee had not claimed deduction under section 36(1)(vii). The ld. DR also submitted that in the year under consideration, the AO has invoked the provisions of section 41(1) and not section 41(4) to bring the recovery to tax. The ld. DR argued that the assessee at the time of making the provision or actual write off had claimed the benefit of deduction and therefore not bringing the recovery into tax would amount to double deduction. 6. We heard the parties and perused the material on record. We notice that the Co-ordinate Bench had been consistently taking a view that the recovery of bad- debts cannot be brought to tax in assessee's case under section 41(4) for the reason that the assessee has not been claiming deduction under section 36(1)(vii). The relevant observation of the Co-ordinate Bench in assessee's own case for AY 2010-11 is extracted below: “4. The Ld.AR stated that the said issue is duly covered by the order in assessee's own case reported in (2009) 33 SOT 7 (Bang) for A.Y. 2005-06. The Printed from counselvise.com 5 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) Ld. AR respectfully relied on the order of coordinate bench ITAT-Mumbai in assessee's own case, ITA No.3644/Mum/2016 A.Y. 2008-09, date of order 03/02/2020. The relevant part of the said order is reproduced as below: - \"90. We noted from the above arguments of both the sides and case law cited by the parties, that the issue is squarely covered by a decision of the Bangalore Bench of the Tribunal in the case of State Bank of Mysore Vs. DCIT (2009) 33 SOT 7 (Bangalore), now merged with assessee. We noted that the Tribunal in the case of State Bank of Mysore (supra) narrated the facts and the facts in the present case are exactly the same as in the case of State Bank of Mysore. In the case of State Bank of Mysore (supra), the assessee had claimed deduction under section 36(1)(viia) of the Act and not under section 36(1)(vii) of the Act. Accordingly, the Bangalore Tribunal has held that section 41(4) of the Act cannot be invoked. Sections 41(1), 41(2), 41(3) and 41(4) of the Act operate in different spheres. Each of the sub-sections to section 41 of the Act deals with different and distinct circumstances. Each of the sub-sections deals with different and distinct topics and one cannot read recoupment under one sub-section into another. We have considered the decision relied on in this regard of Supreme Court in the case of Nectar Beverages (P.) Ltd. vs. DCIT [2009] 314 ITR 314 (SC) wherein the Supreme Court has dealt with the specific section 41(2) of the Act for taxing balancing charge versus taxing the same under section 41(1) of the Act and has concluded that section 41(1) of the Act shall not be applicable. 91. As the aspects of bad and doubtful debts is dealt with specifically under section 41(4) of the Act, as laid down by the Supreme court in Nectar Beverages (supra), section 41(1) of the Act is not applicable in case of the assessee. Further, the primary condition to be satisfied for taxing an amount as deemed income under section 41(1) of the Act is that a deduction/allowance should have been claimed by the assessee in respect of a loss, expenditure or trading liability. A deduction under section 36(1)(viia) of the Act is not for a loss, expenditure or trading liability, but for a provision for bad and doubtful debts. We noted that the learned CIT Departmental Representative had raised a contention that the CIT(A) and AO have not perused the details and, hence, the matter may be restored back which was opposed. In relation to the above contention, without Printed from counselvise.com 6 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) prejudice to the assessee's objection in the event the matter is proposed to be remanded back to the AO, a direction may be given to the AO to delete the addition, if the recovery of the amount is in respect of a write off claimed and allowed as a deduction under section 36(1)(viia) of the Act and not under section 36(1)(vii) of the Act in the earlier years. 92. In view of the above discussion, we are of the view that principally the assessee is entitled for claim of deduction under section 36(1)(viia) of the Act, which has rightly been claimed. The assessee has not made claim under section 36(1)(vii) of the Act in this regard. Hence, we allow the claim of assessee but the matter is restored back to the file the AO for verification purposes. This issue of assessee's appeal is allowed for statistical purposes.\" 5. The Ld. Special Counsel [for brevity, the \"Ld. DR\"] argued and fully relied on the order of the revenue authorities. 6. In our considered view, we find that the said issue is duly covered by the order of co-ordinate bench of ITAT, Mumbai Bench in assessee's own case, which has been quoted above. So, following the judicial precedent in assessee's own case cited supra, we hold that the provisions of section 41(1) or 41(4) is applicable only when recoveries of bad debts in relation to debts, for which deduction under section 36(1)(vii) is allowed. However, the issue is restored to the file of the Ld.AO to verify if the recovery of the amount, in the present case is in respect of write off of claim allowed as a deduction under section 36(1)(viia) or section 36(1)(vii) of the Act, in earlier years. 7. From the perusal of AO's order, we notice that the recovery has been brought to tax under section 41(1) stating that the claim of deduction under section 36(1)(viia) is a prudential write off since the same ultimately gets reduced from the liability and is different from actual write off of bad-debts. Accordingly, the AO has brought to tax the recovery under section 41(1). The argument of the assessee is that under section 41(1) an allowance or deduction made in respect of loss, expenditure or trade liability subsequently recovered only can be brought to tax Printed from counselvise.com 7 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) and that the deduction claimed under section 36(1)(vii) towards provision for bad and doubtful debts does not amount to loss, expenditure or trade liability. Before proceeding further we will understand the special provisions under which the assessee being a banking company is entitled for deduction under section 36(1)(viia). The section allows the assessee to claim deduction towards provision made for bad and doubtful debts subject to limits as provided in the said section. In a particular year when an asset which is considered as a non-performing asset, the assessee is required to make a provision towards the same. Similarly when the asset moves from being a non-performing asset to a performing asset, the assessee reversed the provisions. The net amount gets debited to the P&L A/c and claimed as a deduction under section 36(1)(viia). The assessee besides the deduction under section 36(1)(via) is also entitled for deduction under section 36(1)(vii) towards actual write off. The legislature restricts double deduction by proviso to section 36(1)(vii) where it is stated that the deduction under section 36(1)(vii) cannot exceed the credit balance in the provision under section 36(1)(viia). On perusal of the provisions of section 41, we notice that the various sub-sections under said section specifies recoveries made against deductions claimed under different sections. Section 41(1) deals with the recovery made towards earlier years loss, expenditure or trading liability. The claim of the assessee under section 36(1)(viia) is a deduction towards provision for bad and doubtful debts and therefore cannot fit into either a loss, expenditure or trade liability. Further the recovery / movement of NPA to performing asset is automatically adjusted in the provision account. That is the reason in our considered view for not including the deduction claimed under section 36(1)(viia) within the meaning of section 41. Our view is strengthened by the above observations of the coordinate bench in assessee's own case. Therefore we are of the view that the recovery towards bad and doubtful debts cannot be brought to tax under section 41(1). However, if the recovery made Printed from counselvise.com 8 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) by the assessee is against the actual write off bad debts which was allowed in the earlier years as a deduction under section 36(1)(vii) then the same needs to be brought to tax. Accordingly, respectfully following the earlier years decision of the Co-ordinate Bench, we are remitting the impugned issue back to the AO to examine whether the recovery is against actual write off claimed and allowed in the earlier year under section 36(1)(vii) or towards provision for bad and doubtful debts under section 36(1)(viia) and decide the taxability in accordance with law. Disallowance due to re-computation of deduction under section 36(1)(viia) – Ground No.2 in assessee's appeal & Ground No.2 in revenue's appeal 8. The assessee for the year under consideration has debited to P&L A/c to the tune of Rs. 455,78,00,000/- towards provision for bad and doubtful debts. The assessee computed the deduction claimed under section 36(1)(viia) as under: Particulars AY 2011-12 (Rs.) 10% of average advances 316,45,05,004 7.5% of total income 68,81,76,553 Total of the above (A) 385,26,81,557 Provision for bad & doubtful debts in books (B) 455,78,00,000 Deduction u/s. 36(1)(viia) - lower of A & B 385,26,81,557 9. The AO recomputed the deduction under section 36(1)(viia) on the ground that – (i) that the assessee while computing the average aggregate advances (AAA) under Rule 6ABA should have taken into account only the fresh advances made during the year and not the accumulate balance outstanding as on the last day of each month. (ii) that while computing the AAA under Rule 6ABA has taken into account even the advances made by certain Urban branches whereas only the advances made by Rural branches is to be considered. Printed from counselvise.com 9 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) 10. The CIT(A) partly allowed the claim of the assessee by accepting the contention of the assessee with regard to \"rural branches\" but upheld the AO's decision that only fresh advances need to be considered for the purpose of AAA under Rule 6ABA. The CIT(A) also accepted the without prejudice contention of the assessee that deduction u/s 36(1)(viia) should have been recomputed by the AO after considering the revised 7.5% of Total Income of the assessee consequent to the various addition/disallowances made in course of the regular assessment. 11. The ld. AR submitted that this issue is considered by the Co-ordinate Bench in assessee's own case where it has been held that “7. The issue is inter-connected with Ground 1; so the issue is covered in favour of the assesse in consolidated order dated 10/11/2022 passed by the Special Bench of ITAT, Mumbai Bench-G in case of State Bank of India, Patiala for A.Ys 2013-14 to 2015-16, ITA No. 510, 538 & 1259/Chandi/2017 wherein it has been held that deduction under section 36(1) (viia) read with rule 6ABA has to be allowed on total outstanding advance at the end of each month considering the opening balance. The relevant part of the order of Special Bench is reproduced as below:- \"12. We find that one of the reasons recorded by the Division Bench of the Tribunal for referring the issue to the Special Bench was \"No decision of any higher authorities was brought to our notice by either of the parties\". However, now decisions of two Hon'ble High Courts have been brought to our notice, wherein similar issue has been considered in favour of the taxpayer. 13. As noted above, the Hon'ble Calcutta High Court, vide aforesaid decision, has affirmed the findings rendered by the Division Bench of the Tribunal in Uttar Banga Kshetriya Gramin Bank vs ACIT, in ITA No. 846 and 1745/Kol/2012, wherein the Division Bench of the Tribunal vide order dated 08/07/2015 held that for the purpose of section 36(1)(viia), to compute the aggregate monthly average advance made by the rural branch of scheduled Bank, the amount of advances by each rural branch as outstanding at the end of the last day of each month comprised in the previous year be taken into consideration. The Hon'ble Madras High Court, vide aforesaid decision, has concurred with the decision of the Hon'ble Calcutta High Court. Thus, once two Hon'ble High Courts of the country Printed from counselvise.com 10 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) have expressed their opinion in respect of the issue which arose before us, in absence of contradictory view by any other Hon'ble Court of equivalent or higher judicial hierarchy being brought to our notice, we as a matter of judicial propriety are bound to follow the view so expressed by the Hon'ble High Courts in decisions cited supra. In this regard, it is also relevant to note the following observations of the Hon'ble Supreme Court in ACCE vs Dunlop India Ltd., (1985) 154 ITR 172 (SC): \"8. We desire to add and as was said in Cassell & Co. Ltd. vs. Broome (1972) AC 1027 (HL), we hope it will never be necessary for us to say so again that \"in the hierarchical system of Courts\" which exists in our country, \"it is necessary for lower tier\", including the High Court, \"to accept loyally the decisions of the higher tiers\", \"It is inevitable in a hierarchical system of Courts that there are decisions of the supreme appellate tribunal which do not attract the unamimous approval of all members of the Judiciary.... But the judicial system only works if someone is allowed to have the last word and that last word, once spoken, is loyally accepted\" (See observations of Lord Hailsham and Lord Diplock in Broome vs. Cassell). The better wisdom of the Court below must yield to the higher wisdom of the Court above. That is the strength of the hierarchical Judicial system.\" 14. As regards the submission of the learned Departmental Representative that no substantial question of low was admitted by the Hon'ble Calcutta High Court, we are of the considered view that non-admission of a substantial question of law under section 260A of the Act by the Hon'ble High Court not render the decision of Hon'ble Court to be non-binding and the doctrine of merger would still be applicable in any case, we find that the Hon'ble Madras High Court in the aforesaid decision concurred with the legal proposition laid down by the Hon'ble Calcutta High Court after admitting the question of law as proposed by the Revenue in its appeal on this issue. Thus, we find no merits in this plea raised by the learned Departmental Representative. 15. Therefore, respectfully following the aforesaid decisions passed by Hon'ble Calcutta High Court and Hon'ble Madras High Court, we decide the question referred for our adjudication in favour of the assessee and held that the deduction under section 36(1) (viia) r/w Rule 6 ABA is to be allowed on the total outstanding advances at the end of each month considering the opening balances. Since other issues arising in the appeals are still pending adjudication, therefore, we send the matter back to the Division Bench for disposing of the appeals in the above terms.\" Printed from counselvise.com 11 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) 8. The Ld. DR stands in favour of the orders of the revenue authorities. 9. In our considered view, the issue stands duly adjudicated by the Special Bench of the Tribunal at Mumbai in favour of the assessee, and the binding precedent laid down by the higher judicial forum prevails. Accordingly, ground No.2 (a) to (h) of the assesse is succeeded.” 12. We heard the parties and perused the material on record. As per the provisions of section 36(1)(viia) the assessee is entitled to claim the deduction towards provision for bad and doubtful debts subject to the limitation of total of 10% of average advances + 7.5% of total income. Rule 6ABA provides for the manner of arriving at the Average Aggregate Advances (AAA). The contention of the revenue is that the AAA should take into account only the fresh advances made during the year since for the purpose of arriving at the average the amount of advance is to be divided by the number of months outstanding which in the given case is considered as 12 months by the assessee. The revenue is further contending that if opening balance is considered then applying 12 months for arriving at average is not correct and therefore it is argued that opening balance cannot be included. The assessee however is contending that the language used in Rule 6ABA is that the amount of advance as outstanding at the end of the last day of each month which includes the opening balance accordingly the computation of the assessee is in accordance with what is provided in the Rule. We notice that the Hon'ble Madras High Court and the Hon'ble Calcutta High Court have considered the similar issue and have held that the AAA computed considering the opening balance is in accordance with Rule 6ABA. Respectfully following the above judicial proceedings, we hold that the deduction under section 36(1)(viia) r.w.s. 6ABA is to be allowed on the total outstanding advances at the end of each month including the opening balance. The ground raised by the assessee is allowed. Printed from counselvise.com 12 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) 13. With regard to the relief given by the CIT(A), against which the revenue is in appeal, the ld AR fairly conceded that the issue is decided against the assessee by the coordinate bench in assessee's own case for 2010-11. We notice that the coordinate bench while considering the issue has placed reliance on the decision of the Hon'ble Kerala High Court in the case of CIT vs Lord Krishna Bank [(2010) 195 taxman 57 (kerala)]. The relevant observations of the Hon'ble High Court is extracted below – 4. Next question raised pertains to assessee's claim for deduction of provision for bad debts in terms of Section 36(1)(viia) of the Income Tax Act. Here the only question raised is as to basis of classifying Branches of the Bank as Rural Branches and other Branches. Rural Branch is defined under Explanation (ia) to Section 36(1)(viia) as follows: \"Rural branch\" means a branch of a scheduled bank or a non-scheduled bank situated in a place which has a population of not more than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year.\" What is clear from the above is that classification between Rural and other Branches of a Bank is made based on the population in the place where the concerned Branch is located. While the assessee's case that found acceptance with the Tribunal is that \"place\" referred to in the above definition clause is the Ward of a Panchayat or Municipality, the Assessing Officer took the view that \"place\" contained in the definition clause should mean a Revenue Village. No doubt, \"place\" as such is not defined in the definition clauses and so much so, we have to find out the scope and meaning of \"place\" referred to in the Section. Standing counsel for the department produced before us last published Census Report of 2001. Even though the previous Census Report may be the relevant one, we feel the scope of \"place\" as referred to in the Census Report produced could be adopted for the purpose of this case. What is written in the Census Report 2001 is as follows: \"The basic unit for rural areas is the revenue village with definite surveyed boundaries. The rural area is however taken as the residual portion excluding the urban area and for that no strict definition is followed.\" 5. In our view, the definition clause does not exclude the literal meaning of rural branch which necessarily excludes urban areas. If the assessee's case Printed from counselvise.com 13 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) accepted by the Tribunal that population in a Ward has to be reckoned for deciding as to whether the location of a Panchayat is in a rural area or not is accepted, then probably even in Municipal areas there may be Wards with less than 10000 population thereby answering the branch located in such Municipal area also as a rural Branch. Going by the ordinary meaning of Rural Branch, we feel only Branches of the Bank located in rural areas are covered. When the Legislature adopts population as the basis for classification of rural Branches, that too, with reference to the last Census Report, we feel the basic unit as available for identification of rural area in the Census Report can be legitimately adopted. So much so, we feel the above meaning of rural area contained in the Census Report wherein revenue village is treated as a unit of rural area, can be rightly adopted. So much so, \"place\" referred to in the above definition clause for the purpose of identifying the branch of a Bank as a rural Branch with reference to it's location is the revenue village. Therefore, in our view, the finding of the Tribunal that \"place\" referred to in the definition is the Ward of a local authority like Panchayat or Municipality is incorrect and in our view, a rural Branch has to be always in rural areas and the place referred can easily be taken as a Village. Several Wards may come within a village, whether it be in Corporation, Municipality or Panchayats. There can be no Village in a Municipal or Corporation area where the population is less than 10000. So much so, rural Branches are such of the Branches located in a Village where the population in the Village as a unit is less than 10000. We, therefore, allow the appeal on this issue by reversing the order of the Tribunal and by restoring the assessment. 14. Respectfully following the above judicial precedence, we allow the ground raised by the revenue in this regard. Disallowance of excess depreciation earned Automated Tailor Machine (ATM) by reclassifying as Plant & Machinery – Ground No.3 in assessee's appeal 15. The assessee has classified the ATM, Printers, Mouse, Modem, Scanners, UPS, Network Equipment, etc. under the block \"Computer\" and claimed depreciation at 60% thereon. The AO reclassified these assets as \"Plant\" which is eligible for depreciation at 15% and accordingly disallowed the differential depreciation. On further appeal, the CIT(A) confirmed the reclassification of ATM Printed from counselvise.com 14 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) and deleted the disallowance made towards depreciation on other computer peripherals. 16. The ld. AR submitted that the Co-ordinate Bench in assessee's own case for AY 2010-11 has considered an identical issue where it has been held that “12. On this issue, the assessee claimed depreciation under section 32 of the Act at 60% by treating the ATMs and the UPS as a part of the computer machinery. The Ld.AR stated that both ATM and UPS will not be functional without the help of computer. But the Ld.AO has treated these items in category of plant and machinery and rejected the assessee's claim of depreciation @60%. The Ld. AR stated that the issue is duly covered by the decision of the Hon'ble Karnataka High Court in the case of CIT vs NCR Corporation Pvt Ltd (2020) 117 taxmann.com 252 (Kar). The relevant paragraph 8 of the order of Hon'ble Karnataka High Court is extracted as below: - “8. This takes us to the second substantial question of law whether ATMs are computers and are eligible for 60% depreciation. It is pertinent to note that provisions of the Karnataka Sales Tax Act, 1957 and provisions of Income-tax Act, 1961 are not pari materia provisions. The classification of goods has been provided only for the purposes of sales tax whereas, the provisions of the income tax levy tax on income. It is pertinent to mention here that Appendix 1 to Income-tax Rules, the computer has been treated as plant and machinery. Therefore, the decision relied upon by the revenue in Diebold Systems (P) Ltd. supra has no application to the fact situation of the case. The tribunal by placing reliance on the decision of Bombay High Court in Dy, CIT v. Datacraft India Ltd. (2010) 40 SOT 295 (SB) has held that so long as functions of the computers are performed with other functions and other functions are dependent on the functions of the computer, ATMs are to be treated as computers and are entitled to higher rate of depreciation. It has further been held that computer is integral part of ATM machine and on the basis of information processed by the computer in ATM machine only, the mechanical function of the dispensation of cash or deposit of cash is done. Therefore, it was held that ATMs are computers and are entitled to higher rate of depreciation. The aforesaid finding of fact has been recorded on correct analysis of the material available on record and by placing reliance on decision of the Bombay High Court. 13. & 14.*** Printed from counselvise.com 15 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) 15. After considering the rival submissions and material placed on record, we are of the considered view that the disallowances made by the Ld. AO in respect of excess depreciation on UPS and ATMs are not justified. Both issues are directly covered by the decisions of the Hon'ble Karnataka High Court in CIT v. NCR Corporation Pvt. Ltd. (supra) and the Hon'ble Jurisdictional High Court in Saraswat Infotech Ltd. (supra). Accordingly, following the said binding precedents, we hold that the assessee is entitled to claim depreciation at the higher rate as claimed in its return of income.” 17. The ld. DR on other hand argued that the depreciation rate of 60% is special deduction allowed for computers and therefore classification of an asset as computer should be strictly interpreted. The ld. DR further submitted that the assessee while claiming that the ATM is a computer has expanded the definition stating that the functioning of ATM is fully dependent on computers which is not acceptable. The ld. DR also argued that in that case every asset which is working based on a computer should be classified as a computer which is not the intention. 18. We heard the parties and perused the material on record. The Hon'ble Karnataka High Court in the case of NCR Corporation Pvt. Ltd. (supra) has held that the ATM functioning is fully dependent on computer and therefore ATMs are entitled for higher depreciation at 60%. We in this regard notice that the Hon'ble Bombay High Court in the case of CIT vs. Saraswat Infotech Ltd. (ITA No. 1243 of 2012) has considered a similar issue to hold that the ATM cannot function without the help of computer and would be a part of computer used in the banking industries. We further notice that the Hon'ble High Court has drawn this analogy from UPS being considered as part of computer network which is eligible for depreciation at 60%. Respectfully following above decisions of the Hon'ble High Court and coordinate bench we direct the AO to allow depreciation on ATM at 60% and delete the disallowance made in this regard. Printed from counselvise.com 16 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) 19. With regard to the disallowance of depreciation on addition to computation software, we notice that the reason for the revenue to make the disallowance is that the assessee has not furnished the bills and invoices. During the course of hearing, the ld. AR brought to our attention that a similar issue has been considered by the Co-ordinate Bench in assessee's own case for AY 2010-11 where the issue is remitted back to the AO and prayed for a similar direction for the year under consideration also. The relevant findings of the Co-ordinate Bench are extracted below: “16. The Ld. DR also submitted that the disallowance of depreciation on account of non-furnishing of invoices or bills for the purchase of fixed assets was already considered by the ITAT, Bengaluru Bench in the assessee's own case in ITA No. 1063/Bang/2014 dated 27.05.2016. Considering the same, we direct the assessee to produce the relevant bills and invoices before the Ld. AO for verification, limited to the classification of assets. However, in respect of the rate of depreciation, we have already held that the claim of the assessee is allowable. The matter is remanded to the file of the Ld. AO for the limited purpose of verification, and the assessee shall be afforded a reasonable opportunity of being heard in the set-aside proceedings.” 20. The facts for the year under consideration being identical, we remand the issue for the year under consideration also back to the AO with a direction to examine the bills and invoices pertaining to the claim of depreciation on additions to computers and software expenses and allow the claim in accordance with law. The assessee is directed to file the relevant documents and evidences as may be called for and cooperate with the assessment proceedings. It is ordered accordingly. Disallowance of certain liabilities by treating as contingent liability – Ground No.4 in assessee's appeal Printed from counselvise.com 17 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) 21. The AO has disallowed the following expenses towards which the assessee has made provision and claimed as a deduction on the ground that these provisions are contingent in nature:- Particulars Amount – Rs. Provision for leave fare concession 4,15,00,000/- Provision for re-settlement expenses 60,00,000/- Provision for Silver Jubilee Awards 40,00,000/- Total 5,15,00,000/- 22. The CIT(A) confirmed the disallowance by placing reliance on his own order for AY 2008-09. The ld. AR submitted that the provisions towards these expenses are made on actuarial valuation and is an ascertained liability. The ld. AR further submitted that the liability to make payment towards the above cannot be held as contingent since the assessee is bound to make these payments. Accordingly, the ld. AR submitted that the provisions made towards these expenses are to be allowed as a deduction under section 37(1) of the Act. 23. The ld. AR in this regard placed reliance on the decision of the Co-ordinate Bench in assessee's own case for AY 2008-09 where it has been held that “34. We noted that Section 43B(f) of the Act seeks to allow on cash basis any sum payable by an assessee as an employer in lieu of any leave at the credit of his employee i.e. it covers a provision for leave salary which is only encashable by the employees. Hence, we are of the view that the provision for leave can be discharged in two manners i.e. one by availing the leave and other by way of encashment. In so far as availment of leave is concerned, the salary paid to the employee is known as leave with pay and it does not amounts to salary paid in lieu of leave and, hence, the provisions of section 43B(f) of the Act to that extent do not apply. Leave fare concession/Leave travel concession is in respect of actual payment made to the employees for the travel cost incurred by them on availment of the leave entitled to employees. The same is not towards any leave encashment, and hence it cannot be considered as a sum payable in lieu of any leave to which alone section 43B(f) of the Act applies. As stated above, the provision in respect of unavailed casual leave and sick leave is not encashable and, hence, is not Printed from counselvise.com 18 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) covered by section 43B(f) of the Act. Reliance in this regard is placed by the assessee on the decision of the Bangalore Bench of the Tribunal in the case of Robert Bosch Engineering & Business Solutions Ltd. v/s. DCIT [ITA No. 336/Bang/2014 dated 21.04.2017. Further, the provision made is for an ascertained liability based on an actuarial valuation and is to be allowed as a deduction under section 37(1) of the Act while computing the total income. It is provided towards an ascertained liability, based on actuarial valuation, on a scientific basis and is not contingent in nature. In view of the above factual discussion, legal position based on various decisions, we are of the view that this deduction claimed by the assessee is allowable and hence, allowed. This issue of assessee's appeal is allowed and that of the revenue is dismissed.” ******* “121. We noted that this ground is similar to ground nos. 2.1 to 2.3 of the Assessee’s appeal. The Department has filed an appeal against the CIT(A)’s order wherein deduction has been allowed in respect of provision towards silver jubilee award, resettlement allowance and retirement award on the basis that the same are not covered under section 43B of the Act. Accordingly, the CIT(A) had allowed transition provision amounting to Rs. 61.39 crore and net provision of Rs. 3.90 crore (after considering write back of retirement award of Rs. 1.05 crore). Silver jubilee award is a benefit payable to the employees as per the employment guidelines on completion of 25 years of service with the assessee. Resettlement allowance is payable to the employees as per the employment terms in cases where the employees are posted from one jurisdiction to other. Retirement award is a benefit payable to the employees as per the employment guidelines on retirement. The provision towards these employee benefits is created on the basis of actuarial valuation and in accordance with the Accounting Standards. 122. The Revenue before the Tribunal emphasised that these expenses are contingent in nature and questioned the basis of quantification of these expenses. 123. Assessee argued that the department in its appeal has only contested that the said expenses are contingent in nature. It is not the case of the AO that the said provision is not on a reasonable basis. Therefore, the contentions raised by the Department Representative on the basis of quantification are not justified and cannot be accepted. These costs are part of employee cost and, hence, should be allowed as deduction as normal business expenditure. These costs are incurred based on the employee guidelines and have been quantified on a scientific basis as per actuarial valuation. As submitted in Assessee’s appeal ground 2.1 to 2.3, the said provision is an ascertained liability, determined based on reasonable Printed from counselvise.com 19 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) certainty and hence, clearly allowable. Reliance in this regard is placed on the decision of the Supreme Court in the case of Bharat Earth Movers Vs. CIT [2000] 245 ITR 428 (SC), wherein it is held that the liability is not a contingent one if the liability has been incurred during the accounting year and an estimate with reasonable certainty can be made, even if the liability is to be discharged at a future date. We accordingly, dismiss this issue of revenue’s appeal.” 24. The ld. DR on other hand submitted that the claim of the assessee towards provision is to be examined based on facts pertaining to that particular year and cannot be based on precedence. The ld. DR further submitted that a provision cannot be treated as an ascertained liability until the liability is crystallized and therefore argued that the issue cannot be held to be covered by the decision of the Co-ordinate Bench. 25. We heard the parties and perused the material on record. On perusal of the above findings of the Tribunal, we notice that the claim towards provision for leave fare concession is allowed on the ground that section 43B(f) is not applicable and that provision made for an ascertained liability based on actuarial valuation is to be allowed under section 37(1) for the reason that the actuarial valuation is on a scientific basis and is not contingent in nature. We also notice that the deduction claimed towards provision for resettlement allowance and silver jubilee award for the same reason that it is based on the actuarial valuation and that the provision is an ascertained liability determined based on reasonable certainty. We also notice that the Co-ordinate Bench in this regard has placed reliance on the decision of the Hon'ble Supreme Court in the case of Bharat Earth Movers vs. CIT [200] 245 ITR 428 (SC). It is relevant to mention here that the CIT(A) while confirming the disallowance has relied on its own order for AY 2008-09 which substantiates the claim of the assessee that facts pertaining to the year under consideration is identical. In view of this discussion and respectfully following the judicial Printed from counselvise.com 20 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) precedence, we direct the AO to delete the disallowances made towards provision for leave fare concession, resettlement expenses and silver jubilee awards. Disallowance of deduction under section 36(1)(viii) – Ground No.5 in assessee's appeal 26. For the year under consideration the assessee has claimed deduction under section 36(1)(viii) to the tune of Rs. 43,41,10,331/- based on the following computation: Deduction u/s 36(1)(viii) Amount for AY 2011-12 Profits and Gains of business before claiming deduction u/s 36(1)(viii) [A] 5,32,13,30,820 Gross Total Income (Schedule 13 & 14 of Profit & Loss Account) [B] 45,34,25,43,685 Interest received in respect of eligible business under section 36 (1) (viii) [C] 1849,50,60,118 Eligible business profits for computing deduction u/s 36(1)(viii) [D=A*C/B] 217,05,51,659 20% of Eligible Profits - [D*20] 43,41,10,331 Amounts transferred to Special Reserve (As per Schedule 2) 45,74,69,000 Amount of deduction restricted to 20% of Eligible Profits 43,41,10,331 27. The AO disallowed the said claim on the ground that the assessee has not maintained separate set of books in respect of the eligible business and the manner in which the eligible profits was computed i.e. using turnover as allocation key is against the provisions of the Act. The CIT(A) upheld the disallowance on the ground that the gross interest revenue claimed from the eligible business as disclosed by the assessee is not evidence and is unsubstantiated. Printed from counselvise.com 21 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) 28. The ld. AR submitted that there is no requirement under the law to maintain separate set of books and that the method worked out by the assessee to compute the profits derived from the eligible business is scientific. The ld. AR further submitted that if the literal interpretation of the relevant provision is to be applied then the assessee has satisfied all conditions prescribed under section 36(1)(viii) and accordingly eligible for deduction under the said section. The ld. AR also submitted that the Act or the Rules does not provide for any prescribed method for computing the eligible profits and therefore the assessee has followed a reasonable method to determine the amount eligible for deduction under section36(1)(viii). The ld. AR argued that the assessee has been following the similar method for arriving at deduction under section 36(1)(viii) since AY 2008-09 and therefore the AO is not correct in making the disallowance on the ground that the method adopted is inconsistent with the provisions of the Act. The ld. AR further argued that the revenue in the past years as well has examined the method of arriving at deduction under section 36(1)(viii) and has accepted the claim of the assessee. The ld. AR accordingly argued that the principal of consistency should be followed and in this regard relied on the decision of the Hon'ble Supreme Court in the case of Radhasoami Satsang vs. CIT [1992] 193 ITR 321. The ld. AR also drew out attention to the decision of the Co-ordinate Bench in assessee's own case for AY 2010-11 where a similar issue has been considered and held in favour of the assessee. 29. The ld. DR submitted that the ground on which the disallowance is made is that the interest from eligible business which is the basis for computing the deduction under section 36(1)(viii) is not substantiated by the assessee. The ld. DR further submitted that the eligible business has been defined under the Act and therefore the income which is claimed by the assessee as derived from the eligible Printed from counselvise.com 22 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) business needs to be factually examined. Accordingly, the ld. DR supported the order of the lower authority. 30. We heard the parties and perused the material on record. The provisions of section 36(1)(viii) read as under: “36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28— (viii) in respect of any special reserve created and maintained by a specified entity, an amount not exceeding twenty per cent of the profits derived from eligible business computed under the head \"Profits and gains of business or profession\" (before making any deduction under this clause) carried to such reserve account:” 31. From the plain reading of the above provision, it is clear that the assessee is entitled to claim deduction towards profits derived from the eligible business. The term eligible business with respect to assessee being a Banking Company is the business of providing long-term finance for industrial or agricultural development, development of infrastructure facility in India or development of housing in India. On perusal of the findings of the coordinate bench in assessee's own case for earlier years on the impugned issue we notice that this issue has been allowed on the ground that the principal of consistency should be followed and that the assessee's claim from AY 2008-09 following the same methodology has not been disputed by the revenue. Though we are in agreement with the findings of the Co- ordinate Bench that the principal of consistency as has been held by the Hon'ble Supreme Court in the case of Radhasoami Satsang (supra) is to be followed, we are of the view that the interest in respect of eligible business which is the basis on which the assessee has applied to arrive at proportionate profit from eligible business for claiming deduction under section 36(1)(viii) needs factual examination. Therefore, we remit the issue back to the AO for the limited purpose Printed from counselvise.com 23 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) of verification of the interest from the eligible business declared by the assessee. The AO based on the verification allow the claim under section 36(1)(viii) in accordance with law keeping in mind the principal of consistency as has been laid down by the Co-ordinate Bench. The assessee is directed to provide the necessary details in support of the income from eligible business as declared and co-operate with the assessment proceedings. It is ordered accordingly. Disallowance of unamortized incremental payment / contribution to approved gratuity fund and payment/contribution to approved pension fund – Ground No.6 of assessee's appeal 32. The assessee in the computation of income claimed a deduction of Rs. 59,75,20,000/- on account of unamortized incremental payment to approved gratuity fund and Rs. 46,79,20,000/- towards payment/contribution to approved pension fund. The assessee submitted before the AO that due to the amendment to the payment of Gratuity Act, 1972 as well as the Pension Regulations, 1995, the assessee was required to make certain additional contributions to the gratuity and pension funds. The assessee further submitted that the Reserve Bank of India has issued a Circular dated 09.02.2011 whereby the assessee was required to claim the additional contribution over a period of five years and accordingly in the books of accounts, the assessee has claimed 1/5th of the computation. The assessee also submitted that since as per the provisions of the Act the deduction towards contribution to Gratuity and Pension are allowed on actual payment basis the entire amount has been claimed as a deduction. The AO however did not accept the submissions of the assessee by holding that the spirit of the Circulars has to be applied where the expenditure is required to be claimed on deferred basis and accordingly disallowed the entire claim made by the assessee. On further appeal, the CIT(A) confirmed the disallowance by holding that Printed from counselvise.com 24 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) “18.7 I have considered the appellant's submissions as above. Sec.36(1)(iv) which deals with contributions towards an Approved Superannuation Fund mentions that it is subject to such limits as may be prescribed for the purpose of approving the said Fund and subject to such condition as the CBDT may think fit to specify in cases where the contributions are not in the nature of annual contributions of fixed amounts or annual contributions fixed on some definite basis by reference to salary or member's contribution to the fund. The Board's notification no.100 [F(44A)/8/64-ITJ] dt. 21.10.1965 was issued in respect of the method to be followed for calculating the limit in Rule 88 with regard to \"initial contribution\" and the conditions applicable for later \"lumpsum contribution.\" In the appellant's case Rule 88 is not applicable since the fund in question is already in existence through the \"initial contributions\" made when it started. In the impugned year only the incremental \"lumpsum contribution\" was to be verified with respect to the Board's notification of 1965 which was explicated through circular no.4/P(L VIII-30) dt. 25.11.1965. The appellant was required through order sheet noting of 19.02.2015 to explain whether its contribution satisfied the limit laid down in the Board's notification. There was no compliance on the requested date of 23.02.2015 in this regard. Since this primary verification has not been completed, I am unable to accept the appellant's contention for lack of evidence. I am, therefore, constrained to confirm the AO's disallowance. Since the satisfaction of the condition specified in the Board's notification has not been established, it is considered premature to give a finding that the amounts charged to the Profit & Loss account in the subsequent 4 years, as requested in the without prejudice submission, should be allowed.” 33. The ld. AR submitted that extraordinary contribution to the annuity funds based on actuarial valuation should be allowed as a deduction even though it may exceed the prescribed threshold of 27% of salary laid down in Rule 87/88. In this regard, the ld. AR placed reliance on the decision of the Hon'ble Bombay High Court in the case of Galaxo Smithkline Pharmaceutical (ITA No. 2232 of 2011) and the decision of the Hon'ble Calcutta High Court in the case of Excide Industries Ltd. [2023] 146 taxmann.com 21 (Cal.). The ld. AR further submitted that the Co-ordinate Bench while considering the similar issue in the case of Bank of India Vs. CIT (ITA No. 1642/Mum/2020 dated 22.11.2021) has held that the contribution made to offset the shortage in the funds based on actuarial report is to Printed from counselvise.com 25 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) be allowed under section 36(1)(viii) of the Act. The ld. AR submitted that the lower authorities have not questioned the genuineness of the claim but has made the disallowance on the ground that the RBI Circular provides for deduction only to the extent of 1/5th and the assessee cannot circumvent the claim under the Act. 34. The ld. DR on the other hand argued that the assessee has made the claim of 1/5th of the expenditure in the books of account as per the RBI Circular and by claiming 100% in the computation of income, the sanctity of books of account is violated in the return of income. The ld. DR further argued that the assessee has not given any justification for the claim of 100% of the entire deduction in the return of income before the lower authorities. The ld. DR also argued that the assessee has not submitted the details as called for by the CIT(A) and accordingly supported the orders of the lower authorities. 35. We heard the parties and perused the material on record. The annual contribution made by the assessee towards Gratuity and Pension Fund increased due to the amendment in the Gratuity Act, 1972 as well as the Pension Regulations, 1995. The RBI vide Circular dated 09.02.2011 based on the request from various Banks gave the option to the Bank to amortized the lump sum contribution over a period of five years subject to minimum of 20% of the total contribution every year. The assessee while filing the return of income has claimed the entire amount as a deduction on the ground that the payment is allowable as per the provisions of section 36(1)(iv)/(v) r.w.s. 43B of the Act. From the perusal of the CIT(A)'s finding as extracted in the earlier part of the order, we notice that the CIT(A) has confirmed the disallowance on the ground that the assessee's contribution is a \"lump sum contribution\" and therefore the same should be tested as to whether conditions specified as per Notification dated 21.10.1965 have been fulfilled. The CIT(A) further held that since the assessee did not file any details in Printed from counselvise.com 26 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) this regard, the disallowance is confirmed. Accordingly the issue for our consideration is whether the incremental contribution made by the assessee is a \"lump sum contribution\" which subject to conditions specified by Notification dated 21.10.1965. On perusal of the Notification dated 21.10.1965, we notice that the conditions specified there in are not applicable to annual contributions of fixed amounts or annual contributions fixed on some definite basis by reference to the income chargeable under the head 'Salaries' or to the contributions or to the number of members of the fund. In assessee's case impugned payments are part of the annual contribution made to these funds which had a sharp increase due to the amendments since the assessee has to pay additional amount towards offsetting the shortage that arose in the fund due to amendment. The liability of the assessee towards Gratuity and Pension for the existing employees got increased as a result of the amendments as per the actuarial valuation and the assessee had to contribute additional amount to offset the shortfall in balance in the existing funds maintained in this regard. Therefore in our considered view, the incremental contribution is part of the Annual Contribution and cannot be considered as a lump sum contribution. Therefore we see merit in the submission that the Notification is not applicable to the impugned payments. Be that as may be the Hon'ble Calcutta High Court in the case of Exide Industries Ltd. (supra) has considered the issue of allowability of extraordinary contribution to the annuity funds based on actuarial valuation and held that “4. We have carefully considered the submissions of either side and perused the materials on record. Section 36 of the Act deals with other deductions. Sub-section (1) of section 36 states that deduction provided for in the clause enumerated thereunder shall be allowed in respect of matters dealt with therein in computing the income referred to section 28. Clause (iv) is under section 36(1) would be relevant for our case which is quoted hereinbelow: Printed from counselvise.com 27 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) \"Other deductions: 36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28- (1) to (iii) ** ** ** (iv) any sum paid by the assessee as an employer by way of contribution towards a recognised provident fund or an approved superannuation fund, subject to such limits as may be prescribed for the purpose of recognising the provident fund or approving the superannuation fund, as the case may be, and subject to such conditions as the Board may think fit to specify in cases where the contributions are not in the nature of annual contributions of fixed amounts or annual contributions fixed on some definite basis by reference to the income chargeable under the head \"Salaries\" or to the contributions or to the number of members of the fund;\" 5. In Part-B of the Fourth Schedule to the Income-tax Act, the subject dealt with is approved superannuation fund. In Clause-(iii) thereunder, the conditions for approval have been given and Clause-(iv) deals with provisions relating to Rules. In terms of the said power, the Board may make rules for limiting the ordinary annual contribution and any other contribution to an approved superannuation funds by an employee. In exercise of such power rules have been framed which are found in Part- XIII of the Income-tax Rules, 1962 and rules 87 and 88 thereto would be relevant for our case. 87. Ordinary annual contributions. – The ordinary annual contribution by the employer to a fund in respect of any particular shall not exceed [twenty-seven) per cent of his salary for each year reduced by the employer’s contribution, if any, to any provident fund (whether recognized or not) in respect of the same employee for that year. 88. Initial contributions Subject to any condition which the Board may think fit to specify under clause (iv) of sub-section(1)of section 36, the amount to be allowed as a deduction on account of an initial benefits of a fund shall not exceed twenty- five per cent of the employee's salary for each year (up to the contribution which an employer may make in respect of the past services of an employee admitted to the employee's salary for each year) of his past service with the employer as Printed from counselvise.com 28 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) reduced by the employer's contribution, if any, to any provident fund (whether recognised or not) in respect of that employee for each such year 6. In terms of the above rules, what is required to be seen is whether there is any ceiling fixed in respect of the contribution which have been made by the respondent/assessee and whether it was towards an ordinary annual contribution or whether it was towards an initial contribution. The factual position is not in dispute which have been noted not only by the learned Tribunal but also by the CIT(A). In terms of the above rules, a contribution to an approved superannuation fund is deductible as long as the quantum of the contribution does not exceed the prescribed limit. As noticed from the rules, the limitations have been prescribed only for the initial contribution and ordinary annual contribution to the funds. Thus, the consequence that would follow is that any other contribution made other than initial contribution or an ordinary annual contribution, would not be covered under the rules and no ceiling has been fixed with regard to the amount of such contribution. This has not been disputed by the revenue that the amount paid by the respondent/assessee in excess of 27% of the salaries of the employees are neither towards ordinary annual contribution nor towards initial contribution and the payment was necessitated due to short-fall discovered in the course of actuarial valuation of the funds which is in exceptional circumstances and has been made to ensure that the superannuation funds will be able to discharge its obligation to the employees. The learned Tribunal bearing the above principle in mind and also taking note of the decision of the co-ordinate bench of the Tribunal in Glaxo Smithkline Pharmaceuticals case (supra) allowed the assessee's appeal. The revenue had challenged the order passed by the learned tribunal in the case of Glaxo Smithkline Pharmaceuticals (supra) before the High Court of Judicature at Bombay CIT v. Glaxo Smithkline Pharmacenticals IT Appeal No. 2232 of 2011 which was dismissed by judgment dated 6th March, 2013. 7. However, we are conscious of the fact that the Hon'ble Division Bench while dismissing the appeal had made an observation that even if the expenditure as claimed is not allowable under section 36(1)(iv) of the Act, the same is allowable under section 37 of the Act. However, on this aspect there are other decisions of the Hon'ble Supreme Court which have decided otherwise. Therefore, we do not wish to trade into the said territory. We are satisfied that the amount which was remitted by the respondent / assessee is neither towards an initial contribution nor towards an ordinary annual contribution and, therefore, the ceiling fixed under the rules will not apply to such a contribution. That apart, this contribution had to be made considering the peculiar circumstances and it was a one-time payment, therefore we are of the view that the learned Tribunal rightly allowed the appeal filed by the Printed from counselvise.com 29 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) assessee. That apart the decision in the case of Glaxo Smithkline Pharmaceuticals (supra) has been affirmed by the High Court of Judicature at Bombay.” 36. Further we notice that the AO has made the disallowance since the assessee for book purposes has claimed only 1/5th of the contribution whereas in the return of income has claimed 100%. While doing so, it is relevant to notice that the AO has not questioned the genuineness of the payments. In our view, the claim as per books of accounts cannot be considered as a restriction to the claim under the Act if the claim is otherwise allowable under the Act. In view of these discussions in our considered view, the disallowance made is to be deleted and we direct the AO accordingly. Disallowance of contribution to retired employees medical benefit fund – Ground No.7 of assessee's appeal 37. The assessee during the year under consideration has made a contribution to the tune of Rs. 1,50,00,000/- to the Retired Employees Medical Benefit Fund in accordance with the settlement between the Associate Bank Officer's Association and State Bank of India and its Subsidiary Banks and claimed the same as deduction under section 37(1) r.w.s. 43B of the Act. The AO disallowed the said claim on the ground that the amount is an appropriation of profit and not expenditure as reported below the net profit in annual accounts and that deduction cannot be allowed by virtue of section 40A(9) of the Act on the ground that it covers deduction under section 36(1)(iv)/(iva)/(v) whereas assessee has claimed deduction under section 37. On further appeal, the assessee submitted before the CIT(A) that the Medical Fund is set-up to provide financial assistance to the retired employees for meeting their hospitalization expenses and that the same is an expenditure incurred wholly and exclusively for the purpose of business which is eligible for deduction under section 37(1). However, the CIT(A) confirmed the Printed from counselvise.com 30 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) disallowance on the ground that the fund set-up by the assessee is managed by independent trustees and that the assessee does not have control over the management of the Trust. Accordingly, the CIT(A) held that the claim of the assessee that section 40A(9) is not applicable cannot be accepted for the said reason. The CIT(A) further held that in the case laws relied on by the assessee the contribution has been claimed as a deduction in the P&L A/c whereas in assessee's case the impugned amount is claimed as an appropriation and accordingly it is distinguishable. 38. The ld. AR submitted that the State Bank of Mysore Retired Employees Medical Benefit Fund has been approved under section 10(23AAA) of the Act vide order dated 22.06.2011. The ld. AR further submitted that the assessee has actually contributed the sum of Rs. 1,50,00,000/- and therefore there is no ground for denying the deduction claimed by the assessee. The ld. AR also submitted that the accounting entries in the books cannot make a difference and the deduction if allowable under the provisions of the Act cannot be denied on the basis of entries made in the books of account. 39. The ld. DR on the other hand argued that the contribution is made for the benefit of the Retired Employees and therefore the claim that the expenditure is incurred wholly for the purpose of business is not correct. The ld. DR further submitted that there is no provision under the Act to claim a deduction towards contribution to the fund created for the benefit of Retired Employees and therefore the assessee's claim cannot be allowed. The ld. DR submitted that the decision of the Co-ordinate bench in earlier is based on the contention as to whether the provision for section 40A(9) is applicable to the impugned contribution whereas Printed from counselvise.com 31 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) irrespective the applicability of the said section, the assessee's claim cannot be allowed. 40. We heard the parties and perused the material on record. We notice that an identical issue has been considered by the Co-ordinate Bench in the case of State Bank of India vs. ACIT (ITA No. 3823 & 3824/Mum/2005 dated 29.04.2016) where it has been held that “9.2. Before us the AR relied upon the case of State Bank of Travancore (306FTR-AT128) and stated that it was a welfare measure. The DR supported the order of the FAA. We have heard the rival submissions and perused the materials before us, We find that in the case of State Bank of Travancore(supra), the AO had disallowed the claim of the Bank in respect of the contribution to medical benefit scheme, amounting to Rs.50.00 lakhs. The AD was of the opinion that the provision of section 40A(9) of the Act were applicable and the assessee was mot entitled to claim the expenditure as an allowable item. Matter travelled upto The Tribunal and it deliberated upon the provisions of Section 40A(9)of the Act at length. The Tribunal held that the basic intention of the legislature for insertion of sub section 9 of section 40A was to discourage the practice of creation of camouflage Trust funds, ostensibly for the welfare of the employees and transferring huge funds to such Trusts by way of contribution, that in those cases the investment of the trust corpus was also left to the complete discretion of the Trustees, that to avoid hardship in the case where Trust/Funds had been set up wholly and exclusively for the welfare of the employees prior to 1.4.1984 sub section (10) was also inserted to section 40A. The Tribunal was of the opinion that provisions of section 40A(9) should not make any harm to the expenditure incurred bonafide, that the contribution by the assessee bank was not disputed by the AO, stating that the same was not bonafide, that the funds were not controlled by the assessee banks, that the bonafide contribution made by the assessee as an employer was not hit by section 9 of section 40A of the Act. In the case under consideration, there is no doubt about genuineness of payment nor it is the case of the AO or FAA that Trust was not bonafide or the expenditure was not incurred wholly and exclusively for the employees. Considering these facts of the case and following the judgment of State Bank of Travancore (supra), Ground No.9 is decided in favour of the assessee.” Printed from counselvise.com 32 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) 41. During the course of hearing it has been brought to our attention that the Hon'ble Bombay High Court has dismissed the appeal filed by the revenue against the above order of the Co-ordinate Bench (page. 317 to 332 of PB). The relevant observations of the Hon'ble High Court are extracted herein below – ii. Whether on the facts and in the circumstances of the case and in law, the tribunal was justified in allowing deduction of expenditure of Rs.50 lakhs incurred by the assessee towards contribution to retired employees benefit scheme ignoring the provision of section 40A(9) of the Act which provide for deduction only for payment to approved/recognized funds as referred to section 36(1)(iv) & (v) of the Income Tax Act,1961?” iii. Whether on facts and in the circumstances of the case, the Tribunal was right in law in allowing a loss of Rs. 16,84,481/-on revaluation of on account of loss permanent category investments, even though the same is a notional loss and inadmissible in law? iv. on Whether the facts and in the circumstances of the case and in law, ITAT was right in deleting the disallowance without appreciating the fact that the disallowance determined by the Ld. CIT(A) on the basis of the decision of ITAT in the assessee's own case in earlier years and giving scientific method of disallowance of the interest expenses in respect of share purchase during the year?\" 3. Question No. i arises out of the judgment of the Income Tax Appellate Tribunal in remanding the issue before the Assessing Officer for proper verification of facts. The record would suggest that the assessee, in view of its success before the Tribunal on the issue of disallowance of interest credited to Interest Suspense Account, had not pressed the ground of appeal in the earlier year, however, clarifying that if at all such decision of the Tribunal is reversed by the High Court the assessee would be at liberty to revise the claim. This offer of the assessee was accepted by the Tribunal. On the same ground in the present year the Tribunal followed the formula of the earlier year and for such limited purpose placed the matter before the Assessing Officer. We do not find any error. No question of law therefore arises. 4. Question No. ii relates to the revenue's objection to the assessee's claim of deduction of expenditure of Rs.50 lakhs towards contribution to a fund created for the health care of the retired employees. The revenue argues that such fund not being one recognized under Section 36(1)(iv) or (v), claim of expenditure was hit Printed from counselvise.com 33 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) by the provisions of Section 40A(9) of the Income Tax Act, 1961 (\"the Act\" for short). 5. The Tribunal while accepting assessee observed that the assessee had made such contribution to the medical benefit scheme specially envisaged for the retired employees of the bank. Sub-section (9) of Section 40A of the Act, in the opinion of the Tribunal was inserted to discourage the practice of creation of bogus funds and not to hit genuine expenditure for welfare of the employees. The Tribunal also noted that the Assessing Officer had not doubted the bonafides of the assessee in creation of fund and that such fund was not controlled by the assessee-bank. The Tribunal proceeded on the basis that the Assessing Officer and the CIT (Appeals) had not doubted the bonafides in creation of the Trust or that the expenditure was not incurred wholly must exclusively for the employees. The Tribunal thus allowed the assessee's appeal on this ground and deleted the disallowance. 6. Sub-section (9) was inserted to Section 40A of the Act by Finance Act, 1984 with the retrospective effect from 1 April, 1985 and reads as under:- \"(9) No deduction shall be allowed in respect any sum paid by the assessee as an employer towards the setting up or formation of, or as contribution to, any fund, trust, company, association of persons, body of individuals, society registered under the Societies Registration Act, 1860 (21 of 1860), or other institution for any purpose, except where such sum is so paid, for the purposes and to the extent provided by or under clause (iv) (or clause (iva) or clause (v) of sub-section (1) of section 36, or as required by or under any other law for the time being in force.\" 7. In plain terms, sub-section (9) of section 40A disallows deduction of any sum paid by an assessee as an employer towards setting up of or formation of or contribution to any fund, trust, company etc. except where such sum is paid for the purposes and to the extent provided under clauses (iv) or (iva) or (v) of sub- section (1) of Section 36 or as required by or under any other law for the time being in force. It is undoubted that the instance of the assessee does not fall in any of the above mentioned clauses of sub-section (1) of Section 36. However, the question remains whether the purpose of inserting sub-section (9) of section 40A of the Act was to discourage genuine expenditure by an employer for the welfare activities of the employees. This issue has been examined by this Court on multiple occasions. Before taking note of such decisions, we may notice that the explanatory notes on the provisions contained Finance Act, 1984, in the context of insertion of sub-section (9) to Section 40A of the Act records as under:- \"(ix) Imposition of restrictions on contributions by employers to non- statutory funds. Printed from counselvise.com 34 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) 16.1 Sums contributed by an employer to have created recognised provident fund, an approved superannuation fund and an approved gratuity fund are deducted in computing his taxable profits. Expenditure actually incurred on the welfare of employees is also allowed as deduction. Instances have come to notice where certain employers irrevocable trusts, ostensibly for the welfare of employees, and transferred to such trusts substantial amounts by way of contribution. Some of these trusts have been set up as discretionary trusts with absolute discretion to the trustees to utilize the trust property in such manner as they may think fit for the benefit of the employees without any scheme or safeguards for the proper disbursement of these funds. Investment of trust funds has also been left to the complete discretion of the trustees. Such trusts are, therefore, intended to be used as a vehicle for tax avoidance by claiming deduction in respect of such contributions, which may even flow back to the employer in the form of deposits or investment in shares, etc. 16.2 With a view to discouraging creation of such trusts, funds, companies, association of persons, societies, etc. the Finance Act has provided that no deduction shall be allowed in the computation of taxable profits in respect of any sums paid by the assessee as an employer towards the setting up or formation of or as contribution to any fund, trust, company, association of persons, body of individuals, or society or any other institution for any purpose, except where such sum is paid or contributed (within the limits laid down under the relevant provisions) to a recognized provident fund or an approved gratuity fund or an approved superannuation fund or for the purposes of and to the extent required by or under any other law. 16.3 With a view to avoiding litigation regarding the allowability of claims for deduction in respect of contributions made in recent years amendment has been made retrospectively such trusts, etc., the from 1st April, 1980. However, in order to avoid hardship in cases where such trusts. funds, etc. had before 1st March bonafide incurred expenditure (not being in the nature of capital expenditure) wholly and exclusively for the welfare of the employees of the assessee out of the sums contributed by him, such expenditure will be allowed deduction in computing the taxable profits of the assessee in respect of the relevant accounting year in which such expenditure has been so incurred, as if such expenditure had been incurred by the assessee. The effect of the under-lined words will be that the deduction under this provision would be subject to the other provisions of the Act, as for instance, section 40A(5), which would operate to the same extent as they would have operated had such expenditure been incurred by the assessee directly. Deduction under this provision will be allowed only if Printed from counselvise.com 35 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) no deduction has been allowed to the assessee in an earlier year in respect of the sum contributed by him to such trust, fund, etc.\" 8. The very purpose of insertion of sub-section (9) of section 40A thus was to restrict the claim of expenditure by the employers towards contribution to funds, trust, etc. which was wholly association of persons discretionary and did not impose any restriction or condition for expanding such funds which had possibility of misdirecting or misuse of such funds after the employer claimed benefit of deduction thereof. In plain terms, this provision was not meant to hit genuine expenditure by an employer for the welfare and the benefit of the employees. 9. In case of Commissioner of Income Tax Vs. Bharat Petroleum Corporation Limited, Division Bench of this Court considered a similar issue when the assessee had claim deduction of contribution towards staff sports and welfare expenses. The revenue opposed the claim on the ground that the same was hit by section 40A(9) of the Act. The High Court allowed the assessee's appeal making following observations :- \"For the aforestated assessment year 1985-86, the Rs.2,60,283 under section 40A(9) paid by the Assessing Officer disallowed assessee for staff welfare activities. The assessee claimed that the entire amount was for staff welfare activity. That, the said amount was a grant for staff welfare activity and that the entire amount was for the benefit of the employees and, therefore, the assessee claimed deduction as business expenditure under section 28. However, the Department rejected the assessee's claim on the ground that a club known as Trombay Club was incorporated by the assessee for social, cultural and recreational activities of its members who were required to subscription fees. Hence, the Assessing Officer as also the Commissioner of Income-tax (Appeals) came to the conclusion that the said amount constituted contribution to the club and, therefore, under section 40A(9), the claim for deduction was disallowed. Being aggrieved, the assessee went in appeal to the Tribunal which took the view that the aforestated amount reimbursement of expenses pay represented incurred by a society and, therefore, it did not constitute contribution under section 40A(9). Being aggrieved by the decision of the Tribunal, the Department has come in appeal. Findings on question No. 2: Bharat Petroleum Corporation is a Central Government undertaking. It has incorporated issue a club, essentially to carry on staff welfare activities. Under clause 28, Printed from counselvise.com 36 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) Bharat Petroleum Corporation Limited had a right to directives to the club which were binding on the club. At times, the members of the club. who were the employees of Bharat Petroleum Corporation, took part in tournaments held outside the club premises like Times shield in cricket. On such occasions, the assessee-used to reimburse expenses Corporation incurred by the club. This is the finding of fact recorded by circumstances, the Tribunal. section 40A(9) In is the not applicable. No substantial question of law arises. Hence, our answer to the aforestated question No.2 is in the negative, i.e. in favour of the assessee and against the Department.\" 10. In case of Commissioner of Income-tax-LTU Vs. Indian Petrochemicals Corporation Limited¹, Division Bench of Bombay High Court considered the case where the assessee-employer had contributed to various clubs meant for staff and family members and claimed such expenditure as deduction. Once again the revenue had resisted in the expenditure by citing section 40A(9) of the Act. This Court confirmed the view of the Tribunal and dismissed the revenue's appeal, in which the Tribunal had allowed the expenditure claimed by the assessee. 11. Once again in Commissioner of Income-Tax-14 Vs. case of The Corporation reported in Income Tax Appeal No. 1765 of 2016, revenue had raised such an issue when the assessee had spent certain amounts in either setting up or providing grant-in-aid made to Kendriya Vidyalaya Schools where the students of the assessee-Indian Oil Corporation would receive education. This Court referred to a judgment of Kerala High Court in case of P. Balakrishnan, Commissioner of Income-Tax Vs. Travancore Cochin Chemicals Ltd.¹ and of the decision of this Court in case of Bharat Petroleum Corporation Limited (supra) held that the Tribunal had correctly allowed the assessee's claim of expenditure. In view of this discussion, this question is not entertained. 42. Further we notice that the Co-ordinate Bench in assessee's own case for AY 2009-10 (ITA No. 3645/Mum/2016 dated 06.06.2023) has placed reliance on the above decisions and has held the issue in favour of the assessee. From the perusal of the above observations we notice that the assessee's claim towards contribution to retired employees medical benefit has been examined and allowed under the provisions of section 40A(9). Since no new facts have been brought on record, following the above judicial precedence we have no hesitation to hold that the Printed from counselvise.com 37 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) contributions made by the assessee towards retired employees medical benefit cannot be hit by the provisions of section 40A(9) of the Act. 43. Having said so, we will now address the contention of ld. DR as to whether the amount is otherwise allowable as a deduction under section 37(1) r.w.s 43B as claimed by the assessee for academic purpose. The contention of the revenue is that the contribution to the benefit of the retired employees cannot be considered as incurred for the purpose of business. The true test of an expenditure laid out wholly and exclusively for the purposes of trade or business is that it is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going and of making it pay and not in any other capacity than of a trader. We observe that the expression “for the purpose of the business” is of wider import than the phrase “for the purpose of earning profits.” Its scope extends beyond the routine operations of a business and includes activities such as rationalization of administration, modernization of machinery, and measures taken for preserving the business or safeguarding its assets from expropriation or adverse claims. 44. In assessee's case it is submitted that that the impugned fund is created by the assessee as part of the settlement between the Associate Bank Officer's Association and State Bank of India and its Subsidiary Banks and the fund is approved under section 10(23AAA) of the Act. It is also submitted that the assessee has actually made the payment towards the contribution to the Fund (page 629 of Paper book). As already stated the coordinate bench in earlier years has considered the impugned payment in the light of provisions of section 40A(9) which we have already held as applicable for the year under consideration also. Since the revenue in the present appeal has raised an additional contention that the impugned payments need to be examined under the provisions of section 37(1), we Printed from counselvise.com 38 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) are remitting the issue back to the AO for the limited purpose of examining whether the impugned payments is satisfying the test of \"wholly and exclusively for the purpose of business\" keeping in the legal position as explained above. Needless to say that the assessee be given a reasonable opportunity of being heard. It is ordered accordingly. Disallowance of capital expenditure incurred towards right issue – Ground No.8 of assessee's appeal & Ground No.4 of revenue's appeal 45. During the year under consideration the assessee incurred an expenditure of Rs. 1,85,33,821/- in connection with issue of right shares. The assessee in the books of account charged the entire expenditure incurred towards right issue to the Share Premium A/c in the balance-sheet. The assessee in the return of income has claimed 1/5th of the said expenditure i.e. Rs. 37,06,765/- as a deduction under section 35D. The AO disallowed the claim of the assessee stating that the expenditure incurred towards rights issue of share is a capital expenditure and cannot be allowed as a deduction. Before the CIT(A), the assessee submitted a break-up of the expenditure incurred as tabulated below: Sr. Category Name/Particulars Actual Expense Descriptions as per 35D Amount Total Rs. Rs. 1 Lead Managers Trust Investment Advisors Pvt. Ltd. 1323,600 3104,983 Legal compliance expenses, drafting and printing Trust Investment Advisors Pvt. Ltd. 126,883 SBI Caps Lead Manager for marketing 1654,500 2 Registrar to the issue Integrated Enterprises (India) Ltd. 530,056 530,056 Drafting, Typing and printing expenses (in relation to share certificate) 3 Legal ALMT Legal 463,260 1362,608 Legal and drafting Printed from counselvise.com 39 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) Advisors 237,548 charges 661,800 4 Auditors Statutory Central Auditors 1,1,03,000 1,1,03,000 Legal Expenses 5 Advertisin g & Publicity Expenses Pressman Advertising 98,945 714,747 News Paper Advertisement Pressman Advertising 149,474 Pressman Advertising 149,474 Pressman Advertising 98,945 Pressman Advertising 33,226 Pressman Advertising 33,226 Sobhagya Advertisement 61,447 Sobhagya Advertisement 90,010 6 Printing, Postages, Stationery expenses Shree Nidhi 42,000 2,057,367 Printing Expenses Integrated Enterprises 86,375 Orient Press Ltd. 272,475 Orient Press Ltd. 22,701 Orient Press Ltd. 4,410 Integrated Enterprises (India) ltd. 1,629,406 Postages i) Stamp Duty 5,832,000 ii) SEBI Processing Fee 520,000 iii) Stock exchange listing fee 2,270,251 iv) NSDL/ CDSL processing fee 133,430 7 Contingen cy, stamp duty, listing fee etc. v) Guarantee Commission paid to SBI 595,044 9661,060 Legal postage and other mandatory expenses towards rights issue of shares vi) Out of pocket expenses integrated enterprises 97,060 vii) DD charges/postage piad by shareholders 52,355 viii) Miscellaneous 55,920 ix) Legal opinions Sri. Dorai Swamy Raju 105,000 Total 18,533,821 46. The assessee submitted that the expenditure is incurred is towards extension of the existing undertaking since the assessee has opened 18 new branches as part of its expansion and the proceeds from the rights issue was utilized for setting up the new branches. The CIT(A) after considering the submissions of the assessee held that Printed from counselvise.com 40 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) “22.4 The nature of the above expenditure, prima facie, does not fall within clause (a) above. The legal charges envisaged in clause (b) are specifically for drafting of agreements between the assessee and any other person for a matter related to the business. The legal compliance expenses, drafting and printing as stated by the appellant in the details above were not backed up by any copy of legal agreements which had been drafted, even though the same was required to be furnished during appeal proceedings. The claim, therefore, of payment to Lead Managers, Legal Advisors and Auditors of Rs.31,04,983, Rs.13,62,608 and Rs.11,03,000 respectively for this purpose cannot be accepted. Sub clause (c) (iv) allows for expenditure related to drafting, typing, printing and advertisement of the prospectus only. In case, the appellant is able to produce evidence before the AO to substantiate that any of the drafting and printing expenses included in the payment to lead managers and Legal Advisors relates to the prospectus the same is directed to be verified and allowed. During appeal proceedings, the claims could not be substantiated with evidence of even primary details. 22.5 The appellant's claims as per the scan above includes advertising and publicity expenses of Rs.7,14,747 towards newspaper advertisement. If the assessee files evidence before the AO to establish that it related only to the prospectus, the claim is to be verified and allowed. The details and evidences had not been furnished before me. Even in respect of printing, postage, stationary expenses of Rs.20,57,367, only the printing expenses related to the prospectus, if furnished before the AO, are to be verified and allowed. The drafting, typing and printing expenses related to the share certificate of Rs.5,30,056 paid to the Registrar to the issue are not covered within the scope of clause (c) (iv) 22.6 Apart from the above, and save for the verification as directed, the other expenses are not allowable u/s. 35D. The grounds raised are treated as partly allowed for statistical purposes.” 47. The ld. AR submitted that the expenditure incurred by the assessee is eligible for deduction under section 35D since the same will fall within the category of expenses incurred in connection with extension of an existing undertaking. The ld. AR further submitted that the nature of expenditure incurred by the assessee towards rights issue are falling within the nature of expenditure as specified in section 35D of the Act. The ld. AR also submitted that the fact that the Printed from counselvise.com 41 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) assessee has established 18 new branches during the year under consideration as part of its expansion makes it evident that the expenses are covered under section 35D and accordingly should be allowed as a deduction. The ld. AR in this regard placed reliance on the decision of the Hon'ble Madras High Court in the case of Ashok Leyland Ltd. vs. ACIT [2012] 349 ITR 663 (Mad. HC) and the decision of Hon'ble Rajasthan High Court in the case of Autolite India Ltd. vs. CIT [2003] 264 ITR 117 (Raj. HC). 48. The ld. DR on the other hand submitted that the assessee in the books of accounts has correctly treated the impugned expenses as capital in nature and circumventing the same by claiming a deduction in the return of income. The ld. DR further submitted that the assessee has not established the fact that the expenditure is incurred for the purpose of business before the lower authorities which fact is evident from the findings of the CIT(A). The ld. DR alternatively submitted that the issue may be remitted back to the AO to examine the claim of the assessee that the rights issue is for the purpose of expansion of business. 49. We heard the parties and perused the material on record. From the perusal of the findings of the CIT(A) as extracted in the earlier part of this order, we notice that the CIT(A) has remitted the issue with respect to the majority of expenses to the AO for verification and allow. We further noticed that the CIT(A) confirmed the disallowance for the reason that during the appellate proceeding the assessee could not substantiate the claim with any primary evidences. During the course of hearing the Bench directed the ld. AR to furnish the copy of the offer documents which was submitted by the ld. AR. On perusal of the offer document, we notice that the object of the issue is to meet the increase in Tier I Capital & Total Capital Adequacy Ratio with the implementation of Basel II Standards and to meet the Printed from counselvise.com 42 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) growth in assets primarily loan and investment portfolio. We further notice that the assessee during the year under consideration is claimed to have opened 18 new branches because of which there is a requirement to expand the asset base. The assessee is claiming the deduction under section 35D towards the impugned expenditure on two ground (i) that the expenditure would fall within the category of expansion of an existing undertaking and (ii) that the expenses are would fall within the list of expenses as provided in section 35D. It is therefore appropriate to examine the relevant provisions of section 35D in this regard – Amortisation of certain preliminary expenses. 835D. (1) Where an assessee, being an Indian company or a person (other than a company) who is resident in India, incurs, after the 31st day of March, 1970, any expenditure specified in sub-section (2),— (i) before the commencement of his business, or (ii) after the commencement of his business, in connection with the extension of his 9[***] undertaking or in connection with his setting up a new 9[***] unit, the assessee shall, in accordance with and subject to the provisions of this section, be allowed a deduction of an amount equal to one-fifth of such expenditure for each of the ten successive previous years beginning with the previous year in which the business commences or, as the case may be, the previous year in which the extension of the 9[***] undertaking is completed or the new 9[***] unit commences production or operation : 10[Provided that where an assessee incurs after the 31st day of March, 1998, any expenditure specified in sub-section (2), the provisions of this sub-section shall have effect as if for the words \"an amount equal to one-tenth of such expenditure for each of the ten successive previous years\", the words \"an amount equal to one- fifth of such expenditure for each of the five successive previous years\" had been substituted.] (2) The expenditure referred to in sub-section (1) shall be the expenditure specified in any one or more of the following clauses, namely :— (a) expenditure in connection with— (i) preparation of feasibility report; (ii) preparation of project report; (iii) conducting market survey or any other survey necessary for the business of the assessee; (iv) engineering services relating to the business of the assessee : Printed from counselvise.com 43 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) Provided that the work in connection with the preparation of the feasibility report or the project report or the conducting of market survey or of any other survey or the engineering services referred to in this clause is carried out by the assessee himself or by a concern which is for the time being approved11 in this behalf by the Board; (b) legal charges for drafting any agreement between the assessee and any other person for any purpose relating to the setting up or conduct of the business of the assessee; (c) where the assessee is a company, also expenditure— (i) by way of legal charges for drafting the Memorandum and Articles of Association of the company; (ii) on printing of the Memorandum and Articles of Association; (iii) by way of fees for registering the company under the provisions of the Companies Act, 1956 (1 of 1956); (iv) in connection with the issue, for public subscription, of shares in or debentures of the company, being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus; (d) such other items of expenditure (not being expenditure eligible for any allowance or deduction under any other provision of this Act) as may be prescribed. ****** 50. From the plain reading of the above section it is clear that the expenditure incurred towards extension of an existing undertaking is also allowed under section 35D and that the nature expenditure need to fall within the categories of expenses listed therein. In the given case assessee is contending the part of the expenditure disallowed by the CIT(A) and the revenue is contending the admission by the CIT(A) that certain expenses would fall within the scope of section 35D. As already mentioned, the CIT(A) has disallowed certain expenditure and has remitted certain expenditure to the AO for the reason that the assessee could not substantiate the expenditure with proper supporting evidences. Further the CIT(A) has accepted the submission of the assessee that the expenses would fall within the category of expansion of existing undertaking without recording any factual finding for arriving at the said conclusion. The submission of the assessee that the Printed from counselvise.com 44 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) proceeds of the rights issue are mainly for the purpose establishing 18 new branches needs factual verification, In view of these discussions we are remitting the issue back to the AO to examine the contentions of the assessee and the revenue on merits and decide in accordance with law. ITA No. 684/Bang/2015- Revenue's appeal 51. Ground No.1 is general and not warranting any separate adjudication. Ground No.2 and Ground No.4 have already been adjudicated while considering the assessee's appeal (refer findings in the earlier part of this order. Accordingly the only Ground pending is Ground No.3 which is adjudicated in the ensuing paragraphs. Allowing provision for Janata Deposit Collector Gratuity – Ground No.4 of revenue's appeal 52. The assessee has made a provision for Janata Deposit Collector Gratuity to the tune of Rs. 30,00,381/-. The AO disallowed the same for the reason that there is no employer–employee relationship between the assessee and Janata Deposit Collector and therefore the provisions of section 40A(7) cannot be applied. The AO also held the provision as a contingent liability which has not crystallized. The CIT(A) however allowed the claim of the assessee by placing reliance on his own order for AY 2006-07. The revenue is in appeal against the decision of the CIT(A). 53. The ld. DR argued that Janata Deposit Collector Gratuity is a provision which is contingent in nature and drew our attention to the Tax Audit Report (TAR) in which it is stated to be disallowed. The ld. DR further argued that the CIT(A) has not recorded any independent finding on the facts pertaining to the year under consideration but has simply relied on its own decision for AY 2006- Printed from counselvise.com 45 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) 07. The ld. DR also argued that the important criteria for claiming the impugned expenditure i.e. existence of employee-employer relationship and therefore cannot be allowed as a deduction. 54. The ld. AR on the other hand submitted that Janata Deposit Collector Gratuity is awarded in accordance with the directions of the Hon'ble Supreme Court as per which the Gratuity equivalent to 15 days commission for each year of service is payable on cessation / termination of the agency. The ld. AR in this regard drew our attention to the letter from the Indian Bank's Association providing direction to all the Banks pursuant to the Supreme Court's Ruling (Page 671 of PB). The ld. AR further submitted that the assessee has made a provision based on actuarial valuation towards Gratuity and claimed the same as deduction under section 37(1) of the Act. The ld. also submitted that the Co-ordinate Bench in assessee's own case for AY 2006-07 (ITA No. 439,440/Bang/2013 dated 24.03.2017) while considering the issue in the appeal filed by the revenue against the order of the CIT(A) has remitted the issue back to the AO. The ld. AR further drew our attention to the decision of the Co-ordinate Bench in assessee's own case for AY 2010-11 has held the issue in favour of the assessee. Accordingly, the ld. AR prayed that the order of the CIT(A) be upheld. 55. We heard the parties and perused the material on record. The assessee as per the directions of the Hon'ble Supreme Court in an appeal filed by Janata Deposit Collector has made a provision towards Gratuity calculated @ 15 days commission for each year of service which is payable on cessation / termination of agency. The AO has disallowed the claim on the ground that the provisions of section 40A(7) cannot be applied since there is no employer-employee relationship between the assessee and Janata Deposit Collector. From the perusal of the letter of Indian Printed from counselvise.com 46 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) Bank's Association directing the assessee to make the provision towards Gratuity to Janata Deposit Collector, we notice that the provision is not made as per the payment of Gratuity Act, 1972 but is pursuant to the award granted by the Hon'ble Supreme Court in an appeal filed by Janata Deposit Collector. Therefore, in our considered view the provisions of section 40A(7) cannot be applied to the impugned deduction. Having said so, we need to consider the contention of the assessee that the amount should be allowed as a deduction under section 37(1). The Janata Deposit Collector work as Agent of the Bank to solicit deposits and are remunerated by way of commission. The Hon'ble Supreme Court has directed the Banks to pay Gratuity @ 15 days of commission for each year of service at the time of cessation / termination of the Agency. It is relevant to mention here that the Gratuity is to be paid irrespective of the years of service rendered by Janata Deposit Collector unlike the minimum qualifying service period under the payment of Gratuity Act. When we peruse these facts, we see merit in the contention of the assessee that the provision towards impugned payments is incurred wholly and exclusively for the purpose of the business of the assessee and accordingly is allowable under section 37(1). It is also submitted before us that the provision is made based on actuarial valuation and therefore is not a contingent liability and that the payments are made as and when there is a cessation / termination of Agency. In view of this discussion, we are inclined to agree with the claim of the assessee that the expenses should be allowed as a deduction as has been held in assessee's own case for AY 2010-11. The ground of the revenue is dismissed. Printed from counselvise.com 47 ITA Nos. 661 & 684/Bang/2015 State Bank of India (erstwhile State Bank of Mysore prior to merger) 56. In result, appeal of assessee and the appeal of the revenue are partly allowed. Order pronounced in the open court on 03-11-2025. Sd/- Sd/- (JUSTICE (RETD.) C.V. BHADANG) (PADMAVATHY S) President Accountant Member *SK, Sr. PS Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. DR, ITAT, Mumbai 4. 5. Guard File CIT BY ORDER, (Dy./Asstt. Registrar) ITAT, Mumbai Printed from counselvise.com "